Can Money Really Buy Happiness?

Yes, money can buy us many things, but is happiness one of them? In the broadest sense: yes. But not necessarily in the ways you think.

For one, the effect on our happiness depends a lot more on what we do with our money — and how we got it — than on how much we have. That’s something I realized during my short investment banking career. I kept telling myself that the long hours and hard work would “pay off” when I received my big annual bonus. But in the end, while I bought some nice things and saved a bit more than I might have otherwise, I felt very little additional happiness from receiving and spending the bonus money.

When we slave away with the belief that making more money will (eventually) bring us more happiness, it often has the reverse effect. And that’s not the only common misconception out there about money and happiness. Here are six discoveries researchers have made about how money does — and doesn’t — make us happy.

Finally, An Answer to the Age-old Myth

Yes, money can buy us many things, but is happiness one of them? In the broadest sense: yes. But not necessarily in the ways you think.

For one, the effect on our happiness depends a lot more on what we do with our money — and how we got it — than on how much we have. That’s something I realized during my short investment banking career. I kept telling myself that the long hours and hard work would “pay off” when I received my big annual bonus. But in the end, while I bought some nice things and saved a bit more than I might have otherwise, I felt very little additional happiness from receiving and spending the bonus money.

When we slave away with the belief that making more money will (eventually) bring us more happiness, it often has the reverse effect. And that’s not the only common misconception out there about money and happiness. Here are six discoveries researchers have made about how money does — and doesn’t — make us happy.

Making More Money Can Make Us Less Happy

It’s almost ironic. We work extremely hard to make more money because we believe it will make us happier, but we just end up feeling more stressed and overworked. Yet that’s what often happens in our quest to earn more. "The belief that high income is associated with good mood is widespread but mostly illusory," write Princeton economist Alan B. Krueger and psychologist Daniel Kahneman. "People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities."

A 2010 European Quality of Life survey also revealed a high correlation between the use of our time and our subjective well-being. While researchers found that the single indicator with the biggest impact on life satisfaction is deprivation, defined as the inability to afford basic lifestyle goods and services, they found that those who worked long hours at work and had poor work-life balance also generally ranked themselves very low on subjective well-being. The conclusion: Once our basic needs are met, our happiness depends a lot more on what we are doing with our time than how much money we are making.

There’s a Point of Diminishing Returns

Happiness levels do rise with yearly income — but only to a point. What point is that? About $75,000, according to a 2010 study by Nobel prize-winning scholar and psychologist Daniel Kahneman and his colleagues at Princeton University. According to Kahneman, “when people have a lot more money, they can buy a lot more pleasures, but there are some indications that when you have a lot of money, you will savor each pleasure less.” What happens above the $75,000 threshold? Kahneman says that ”further increase in income no longer improves individuals’ ability to do what matters most to their emotional well-being, such as spending time with people they like, avoiding pain and disease, and enjoying leisure.”

While there may not be any additional benefit to earning more money, there may be additional consequences. Social psychologists and co-authors of “Happy Money: The Science of Smarter Spending” Elizabeth Dunn and Michael Norton found, for example, that abundance can be the enemy of appreciation. According to Dunn, “a fundamental problem with modern society is that we live in a giant candy store. If you are wealthy, it’s like the Willy Wonka Factory. It’s unbelievable what you can go out and buy. The question is: why aren’t we incredibly happy then? Part of the answer is that we get used to things and stop appreciating them.”

When we treat ourselves too often it becomes less special. The fulfillment or happiness we derive from the experience becomes less profound with each repetition as it becomes the new norm or expectation. (On the other hand, indulging in certain experiences or objects once in a while allows them to remain special and increases our appreciation for them.)

Time Spent Can Matter More Than Money Made

How long is your daily commute? We’ll often travel far (and often) because the monetary opportunity seems worth it. But a longer commute — and a lot of traveling — generally makes us less happy overall, even if we’re making more money. Swiss economists Bruno Frey and Alois Stutzer call the former the “commuting paradox” and argue that too many employees make the unequal trade off. The rewards associated with longer commutes — e.g. a higher-paying job — don't typically compensate for the sacrifices we end up making by working so far from home.

Spending more time in traffic, or on trains, means spending less time with family and friends as well as incurring more health issues such as back pain, higher cholesterol, weight gain and anxiety. A study by the American Journal of Preventative Medicine of 4,297 Texans showed that as their commuting distances increased, physical activity and cardiovascular fitness dropped. Even more, blood pressure, body weight, waist circumference and metabolic risks rose. Harvard political scientist Robert Putnam offers a specific calculation: His rule of thumb is that every ten minutes of commuting results in ten percent fewer social connections (assuming you’re driving alone) and connects commuting to social isolation, which causes unhappiness.

New Experiences Mean More Than New Things

In a recent study, Cornell University researchers found that paying for an experience typically improved well-being more than purchasing an item (even one you really like). Why? Happiness related to objects tends to deteriorate with time. The new shirt that brought you a lot of joy last week, for example, may quickly become just another item in your closet.

We’re also more prone to comparing ourselves to others when we buy material goods (never a recipe for happiness) — and we can feel buyer’s remorse after the initial rush of a new purchase fades, particularly if it cost a lot. In a survey by Credit Donkey more than half of the 1,045 respondents said they often or sometimes feel guilty about their purchases.

Experiences, on the other hand, create lasting memories and strengthen relationships. Share a meal, a class, or a vacation with a friend, and you create shared memories and a stronger social connection. And there’s plenty of research to show that social connections make us happier. “You’re the sum of your experiences, not the sum of your possessions.” says Sonja Lyubomirsky, professor in the Department of Psychology at the University of California, Riverside and author of “The How of Happiness.”

Pay in Advance to Increase Happiness

Turns out the “buy now, pay later” method isn’t great for your finances or your mood. Charging purchases on our credit cards now can leave you feeling frustrated or depressed when the bill comes weeks later. On the other hand: saving for something you want, and paying for it in advance, can make you happier. (And it’s good for your financial well-being too.) First, you get to indulge in the pleasure of anticipation. (Sometimes this is even more gratifying than the experience itself.) Then, when you get to the experience, you also regard the purchase as “free” and don’t feel the monetary stress of the purchase while you are enjoying it.

Dunn, the social psychologist and co-author of “Happy Money,” gives the example of “a nightmarish vacation where you had to pay for every single activity in cold hard cash — every margarita, every slice of pie, every towel for the pool.”

Then, she says, imagine instead that you paid for that vacation — all expenses included — in advance. “Suddenly, the entire trip feels free,” she notes, and you’re able to enjoy it without worrying about how you’re going to pay for it or how much you’re spending.

Spending on Others Makes us Happy

We are highly social creatures and much of our happiness depends on the quality of our relationships. According to Dunn, “almost anything we do to improve our connections with others tends to improve our happiness as well, and that includes spending money.” Dunn did an experiment where researchers across the University of British Columbia campus handed students a $5 or $20 bill. The students were randomly assigned to spend the cash on themselves or others by the end of the day. In the evening, those who had been told to spend on others reported feeling happier, even if they only spent $5, than those assigned to buy for themselves.

The rewards of social spending can even be detected on MRI brain scans. In a University of Oregon study, people were given the option to donate money to a food bank while others were forced to give. Both forms of giving, optional and forced, activated areas of the brain associated with receiving rewards.

Ashley Feinstein Gerstley is a money coach and founder of the Fiscal Femme where she demystifies the world of money and personal finance. Get her exclusive how-to guide “30 Days to Financial Bliss" — free for DailyWorth readers.